Taxation rate will likely rise

Area lawmakers react to governor’s oil, gas production proposal

Posted: Monday, February 27, 2006

Rates meant to modernize the way Alaska taxes oil and gas production proposed Tuesday by Gov. Frank Murkowski are unlikely to emerge from Legislative review unchanged, members of the Alaska House said Friday.

In a press conference Tuesday, the governor announced he had reached an agreement on a $20 billion natural gas pipeline contract with the three major producers — ExxonMobil, BP Alaska and ConocoPhillips. Linked to that deal is a proposal to establish a new tax regime, one that would tax net oil and gas values and provide incentives to reinvest capital in Alaska.

The net-values tax would replace the existing production taxes on oil and gas and dump the antiquated economic limitation factor, or ELF, used to calculate production taxes. Those and numerous other provisions — some of them likely to be contentious — are written into House Bill 488 submitted Tuesday by the House Rules Committee at the governor’s request.

Late last week, state lawmakers were anticipating a proposal to tax producers’ net profits at 25 percent, while offering a 20-percent tax credit. But after meeting with the major producers over the weekend, Murkowski announced rates of 20 and 20, saying that at current prices, Alaska would see another $1 billion a year in revenues under his new scheme.

Friday, Alaska House members from the Kenai Peninsula said the governor’s taxation rate is likely to be increased.

“There are two debates now, on the tax rate and credit rate” Rep. Paul Seaton, R-Homer said. “I would feel more comfortable at the starting point of 25 and 20 as he originally announced rather than 20 and 20.”

A lot more about how tax credits would be written into law and applied to investment and other operational costs must be known before he’ll be ready to sign on, he said.

“We want to make sure we’re not setting up a situation where (the rates) are only covered in regulation,” he said. “Part of the purpose of doing this at this time is to tie the taxing regime to the gas line contract. I’m not sure you can tie regulations to a contract. Those regulations could be changed and that wouldn’t give the security the investors are looking for.”

A statute establishing the tax rate, however, could not be altered without an act of the Legislature. In addition, Seaton said, expenses eligible for credits must be well defined.

“The rates were lower than expected, and I suspect there will be some movement upwards on the tax portion,” said Rep. Kurt Olson, R-Soldotna, adding that House members have asked to see how a range of tax rates would affect the revenue stream.

“We want to put it all on a spread sheet run it out on various prices of oil,” and find a happy medium, he said.

Rep. Ethan Berkowitz, D-Anchorage, believes the tax rate is too low and incentive rate too high. Democrats already have proposed a 30 and 15 set of rates for oil in Senate Bill 292.

“This is one of the most complex, most interesting and most unusual political bills,” Berkowitz said of the governor’s measure. “I don’t have any idea where people are going to fall on this.”

Berkowitz said the issues — the tax proposal and the gas pipeline contract it is tied to — were “creating some very strange alliances” that crossed party lines. “The more senior people down here — we get it,” he said. “They’re not being partisan on this thing at all. They know the numbers are too low.”

The tax rate has “huge ramifications” and involves “a complex decision tree in which each decision is met with more complex decisions,” Berkowitz said. “It is pivotal to the state’s economic future. The more people understand that the better off we’ll be.”

The consequences of doing it wrong, he added, would be huge, but so would the benefits of doing it right.

Other issues are drawing attention from lawmakers.

The governor’s proposal essentially amounts to a “flat tax” rate. Of late, an increasing number of lawmakers are talking about a progressive tax structure that would boost the tax rate if oil and gas prices exceed a certain point.

“I want to get some more progressivity. When the price is above $60, or $70 or $80 a barrel, it should go into a little higher tax rate,” Seaton said. “We don’t want to end up with another ELF to where we are kicking ourselves.”

Another provision giving some lawmakers pause is what is referred to as the “claw back,” a provision allowing producers to claim credits for certain costs incurred between July 1, 2001, and July 1, 2006. That idea only surfaced with the introduction of the governor’s bill, Seaton said.

“The producers want that,” he said. “I definitely won’t support that. I’m sure we majority members and many of the minority will move to delete that section.”

The 20 and 20 rates were a bit of a surprise since the administration’s oil and gas tax and pipeline project consultant Pedro van Meurs had recently recommended 25 and 20. According to Berkowitz, the difference in impact on revenues between the governor’s 20-percent tax credit and the Democrat’s proposed 15-percent credit would be negligible, but the difference in revenue between the 25- and 20-percent tax rates would be substantial.

Overall, it may be the way the governor wants to link gas to oil that could prove problematic for lawmakers, Berkowitz said. That linkage could actually hurt the state’s revenue stream by limiting the state’s ability to reach separate gas or oil deals with various producers large and small, he said.

The governor’s decision to focus on negotiations with the major producers that control the gas rather than including entities that don’t has put “a behemoth” across the negotiating table. Officials representing the majors “are not evil,” Berkowitz said, but they do have different interests.

“We’ve created a monopolistic force and now we’re trying to negotiate against it,” he said.

Efforts to reach Rep. Mike Chenault, R-Nikiski, for comment were not successful.

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